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Real Estate - Commercial

Area Construction Costs On The Rise

By Cece Nunn, posted Sep 22, 2017
In August, the city of Wilmington and developer of River Place, which is replacing the Water Street parking deck, announced that costs had increased for the now more than $80 million project. (photo by Cece Nunn)
As new homes and commercial spaces rise in the Wilmington area, so do construction costs.

While concrete, cement and other building materials go up every year, officials at Leland-based Trusst Builder Group have recently noted the sharp rise in lumber costs.

“Our biggest surprise from the end of last year to April: Lumber costs went up 30 percent,” said Steve Hamalainen, director of operations for Trusst Builder Group, which builds homes in the Wilmington area. “That hit us for around $5,000 each house.”

Some of the blame lies in tariffs the U.S. has imposed on Canadian lumber, Hamalainen said.

Randy Johnson, area manager for coastal North Carolina for Builders FirstSource, said construction materials are subject to the laws of supply and demand like any other product, but their prices can also still be unpredictable. Recent natural disasters have played a part as well.

“With the two hurricanes [Harvey and Irma] and the fire out west, we’re seeing buyers that were on the sidelines stepping in and buying more commodity product,” Johnson said.

It remains to be seen what impact the damaging hurricanes might have on construction costs in the future. On Sept. 13, National Flood Insurance Program officials said that early estimates showed Hurricane Harvey resulting in about $11 billion in payouts to insured homeowners, mostly in southeast Texas, according to an Associated Press story.

Before Hurricane Harvey caused massive flooding in Houston earlier this month, the city was the No. 2 market in the country for new home starts, with builders starting more than 27,000 homes in the 12 months leading up to the end of the second quarter of 2017, according to a Metrostudy lot-by-lot survey.

Some in the Wilmington-area building industry don’t expect their work to come to a standstill anytime soon, even if predictions about the demand and prices for construction materials hold true.

“As soon as the panic dies down, I suspect that things will come down back to the normal that was normal for the past eight months,” Johnson said.

Commercial building has also been feeling the effects. A high-profile example: In August, the city of Wilmington and Chapel Hill-based development firm East West Partners announced that costs had increased for River Place, a now more than $80 million mixed-use project replacing the defunct Water Street parking deck in downtown Wilmington.

In a revised development agreement, the city and the company are splitting the additional cost of nearly $8 million – with East West paying $4.2 million and the city $3.8 million.

“The design for River Place was started two years ago. During this time, construction costs have escalated significantly. East West Partners has absorbed these costs and made creative adjustments in its plans, in both design solutions and construction methods, to partially accommodate these increased costs without sacrificing the quality of River Place,” Roger Perry, owner of East West Partners, explained in an email last month. “In spite of these creative solutions, our final budget has, nonetheless, increased during this period by over $5M. It is perfectly understandable that the same has happened to the city’s budget for the parking deck. This has been a very collaborative effort in creating a public-private partnership, and we are confident that as the city goes through this necessary process, it will see the value in making these budget adjustments so the project can proceed immediately.”

Lucien Ellison, project manager for East West Partners, said last month that the firm hoped that the demolition of the Water Street parking deck, a major step for the creation of River Place, would start before the end of September.

“But we still have a fair amount to accomplish before we can get to that point,” Ellison said.

Ken Dull, president of Wilmington- based McKinley Building Corp., said of construction costs, “Since the economy’s gotten better, they’ve been consistently going up.”

Ellison expressed a similar opinion.

“A lot of people are benefiting from the economy, but there’s some downsides,” he said.

For River Place, the city’s maximum allowable investment has risen from about $21 million to $24.2 million.

“What has caused the increase? Time,” said Deputy City Manager Tony Caudle in a presentation to the Wilmington City Council in August.

He used a recent example: The city fire station at Cinema Drive completed in 2015 cost about $3.5 million, while the Shipyard Boulevard fire station currently under construction costs $3.43 million – but for 30 percent less space, he said.

Other factors involved in the River Place increase include that the original development agreement costs were estimates and not fully detailed and labor shortages, Caudle said.

The contractor and developer “have had some difficulty in finding subcontractors,” Caudle said, explaining that before the Great Recession, “there was a plethora of subcontractors [in the Wilmington area] and many of those folks were not able to make it through that recession, and so we’ve been left with less subcontractors in a market that is now beginning to boom.”

Jim Hundley Jr., whose company has offices in Wilmington and Charleston, South Carolina, concurs. Hundley is vice president of business development and marketing for Thomas Construction Group, and the firm’s projects include rebuilding the local YMCA’s Market Street facility.

“Not only has the cost of materials continued to increase, but the subcontractor labor market has been extremely busy. That has led to a sharp rise in our labor costs in every trade,” he said. “The recent storms will continue to put upward pressure on prices for the foreseeable future.”

For builders of houses, “plumbers and electricians are the biggest stress around here, and I think it’s the same nationwide,” Hamalainen said.

Hamalainen and Shawn Horton, owner of Trusst Builder Group, said two of the ways Trusst has been able to maintain a good subcontractor base is by paying fair wages and paying on time.

Some in the construction industry say subcontractor rates could increase and availability decrease as the full scope of hurricane damage becomes clear.

But despite rising costs or potential increases in the future, the resale market in Wilmington is strong, Horton said, “and the new home sales are still going to be good just because of the scarcity. Even nationally, there’s a low inventory of new homes.”
 
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